Costing Flow

Complete documentation of inventory costing methods in NetSuite - how costs flow through transactions and impact GL.

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In This Section

Page	Description
Average Costing	Weighted average cost method
Standard Costing	Fixed costs with variance tracking
FIFO/LIFO Costing	First In First Out / Last In First Out
Lot/Serial Costing	Specific identification costing
Cost Engine	Hourly costing engine, triggers, GL impact, backdating
Troubleshooting	Common costing issues and solutions

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Costing Methods Overview

Costing Methods Comparison
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AVERAGE COSTING
  └── Cost = (Total Value) / (Total Quantity)
      Re-averages on each receipt

STANDARD COSTING
  └── Cost = Fixed Standard Cost
      Variances captured on receipt/sale

FIFO (First In, First Out)
  └── Sells oldest inventory first
      Best for perishables

LIFO (Last In, First Out)
  └── Sells newest inventory first
      Tax advantages (higher COGS in inflation)

SPECIFIC (Lot/Serial)
  └── Tracks actual cost of each unit
      Required for serialized items

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Comparison Table

Method	Cost Calculation	When Cost Changes	Best For
Average	Weighted average	Every receipt	General merchandise
Standard	Fixed cost	Never (variances instead)	Manufacturing
FIFO	Oldest cost first	As layers deplete	Perishables, dated goods
LIFO	Newest cost first	As layers deplete	Tax optimization
Lot/Serial	Actual unit cost	Never (specific to unit)	High-value, tracked items

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GL Impact Summary

Cost Flow Through Transactions

GL Cost Flow
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PURCHASE:
  Inventory Asset    $XXX  Dr  ← Add inventory at cost
  A/P (or IRNB)            $XXX  Cr

SALE:
  COGS               $XXX  Dr  ← Cost of items sold
  Inventory Asset          $XXX  Cr  ← Remove at cost

Note: HOW cost is calculated depends on costing method

Method-Specific GL

Method	Receipt GL	Sale GL
Average	Inventory at purchase cost, recalculates average	COGS at current average
Standard	Inventory at standard, variance for difference	COGS at standard
FIFO	Inventory in cost layers	COGS from oldest layer
LIFO	Inventory in cost layers	COGS from newest layer
Specific	Inventory at actual cost	COGS at actual cost

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When to Use Each Method

Costing Method Decision Tree
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Do you need to track specific unit costs?
│
├── YES ──▶ Lot/Serial Costing
│           (Serialized items, high-value goods)
│
└── NO ──▶ Do you have stable, predictable costs?
           │
           ├── YES ──▶ Standard Costing
           │           (Manufacturing, predictable purchasing)
           │
           └── NO ──▶ Are your products perishable or dated?
                       │
                       ├── YES ──▶ FIFO Costing
                       │           (Food, medicine, dated goods)
                       │
                       └── NO ──▶ Average Costing
                                   (General merchandise)

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Quick Example

Same transactions, different costing results:

Example: Widget Purchases and Sales
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Starting: 0 units

Jan 1:  Buy 100 units @ $10 = $1,000
Jan 15: Buy  50 units @ $12 = $600
Jan 20: Sell 75 units

AVERAGE COSTING:
  Average cost = $1,600 / 150 = $10.67
  COGS = 75 × $10.67 = $800

FIFO COSTING:
  Sell oldest first (75 from Jan 1 batch)
  COGS = 75 × $10 = $750

LIFO COSTING:
  Sell newest first (50 from Jan 15, 25 from Jan 1)
  COGS = (50 × $12) + (25 × $10) = $850

STANDARD COSTING (standard = $11):
  COGS = 75 × $11 = $825
  Purchase variance = ($1,600 actual - $1,650 standard) = -$50

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Changing Costing Methods

Changing costing methods is significant:

Consideration	Impact
Accounting standards	May require disclosure
Historical data	Previous transactions unchanged
Inventory value	Recalculated at change
Audit requirements	Documentation needed

Recommendation: Choose costing method during implementation and rarely change.

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Next Steps

• Average Costing - Most common method
• Standard Costing - For manufacturing
• FIFO/LIFO Costing - Layer-based methods
• Lot/Serial Costing - Specific identification
• Cost Engine - Hourly costing recalculation
• Troubleshooting - Common issues and solutions